ECON FINAL
In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______
$0.75 billion; more than $0.75 billion
In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______
$1 billion; more than $1 billion
Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year's GDP
20
an economy produces 50 widgets, which sell or $4, and has a M of $100, V =
200/100 = 2
an economy with constant velocity has real GDP growth of 3 percent, money growth of 7 percent, and a real int rate of 2, nom int rate =
6
M =
C + D
B =
C + R
when prices of different goods are increasing by different amounts, the price index that will rise the fastest is the
CPI
NNP =
GNP - depreciation
______ cause(s) the capital stock to rise, while ______ cause(s) the capital stock to fall.
Investment; depreciation
the unemployment rate measure the fraction of the
LF that is not working
What are reasons why some countries are poorer than others?
Low saving and human capital, slow technological progress, and low efficiency
Money market mutual fund shares are included in:
M2 only
in a system of fractional reserve banking, lending by banks increases
Money Supply
If the equation for a country's Phillips curve is π = 0.02 - 0.8(u - 0.05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?
above 2 percent (0.02)
stagflation is caused by
adverse shock to AS
Which of the following will shift the aggregate supply curve up to the left
an increase in the expected price level
if an import restriction does not influence domestic investment or saving, it causes a country's C to
appreciate, resulting in unchanged trade balance
if the demand for real money balances depends on the nominal interest rate, then higher inflation can
arise from the expectation of future money growth
The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:
basing their opinions on recently observed inflation.
When planned expenditure is drawn on a graph as a function of income, the slope of the line is
between zero and one
If the Fed announces that it will raise the money supply in the future but does not change the money supply today,
both the nominal interest rate and the current price level will increase
if the central bank wants to increase the M, it can _____ in an open market or ______ reserve requirements
buy bonds, decrease
because of leverage, 5% decline in value of banks assets will cause the value of bank's _____ to fall by _____
capital, more than 5%
hyperinflation tends to occur when
central banks finance large government budget deficits
In the IS-LM model, changes in taxes initially affect planned expenditures through
consumption
the largest component of GDP
consumption
in the case of unanticipated inflation
creditors with an unindexed contract are hurt because they get less of what they expected in real terms
if Fed wants to increase money supply
decrease discount rate
IS-LM model, causes income to decline and interest to rise
decrease in M
an increase in the real interest rate will
decrease investment
if the economy has more capital than in the GR, reducing the saving rate will
decrease steady income but increase the steady consumption
An increase in the supply of capital will
decrease the real rental price of capital
In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate
decrease, decrease, decrease, decrease
Immigration increases LF in the economy with Cobb-Doug, the wage will ____ and rental price of capital will _____
decrease, increase
a decrease in G holding T constant will ____ r and ____ I
decrease, increase
if someone quits their job to become a stay at home parent, the LF participation rate _____ and unemployment will _____
decrease, increase
According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer
decreases production
when Fed makes an open market sale
decreases the monetary base
other things equal, an increase in G pushes trade balance toward _____ and causes the currency to ____
deficit, appreciate
the severity of the Great Depression may be explained by an increase in expected
deflation, which raised real int rates above nom int rates
rightward shift in aggregate ___ moves the economy along the SR PC to a point with ____ inflation
demand, lower
In the Solow growth model with population growth and technological change, the break-even level of investment must cover
depreciating capital, capital for new workers, and capital for new effective workers
According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer
does not change production
the purpose of ____ growth theory is to explain tech progress. Some of these models do so by questioning the solow model's assumption of ___ returns to capital
endo, diminishing
Imputed values included in GDP are the:
estimated value of goods and services that are not sold in the marketplace
When a person purchases a 90-day Treasury bill, he or she cannot know the
ex post real interest rate
core inflation rate
excludes food and energy prices
According to the Phillips curve, other things being equal, inflation depends positively on
expected inflation
The short-run aggregate supply curve is drawn for a given
expected price level.
according to the fisher effect, an increase in ____ inflation causes an equal increase in the ____ interest rate
expected, nominal
When the real exchange rate rises
exports will decrease and imports will increase
recessions are periods of
falling incomes
in a typical recession, consumption ____. Investment moves in the same direction but proportionately _____
falls, more
In the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case the interest rate ______ and output ______
falls, rises
national income accounts for
federal, state, and local governments
market clearing models assume that price is _____ and are best applied to understand the economy in the _____
flexible, long run
The basic aggregate supply equation implies that output exceeds natural output when the price level is:
greater than expected p level
According to the sticky-price model, other things being equal, the greater the proportion s of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase
greater, increase
When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______
greater; outward
one explanation for the differing number of hours worked in the US and Europe
higher taxes in Europe
LM curve is upward sloping because ____ income increase the ____ of money and thereby interest rate
higher, demand
IS curve is downward sloping because a ____ int rate reduces ____ and thereby income
higher, planned investment
People use money as a store of value when they
hold money to transfer purchasing power into the future.
models of Schumpeterian destruction aim to explain
how entrepreneurs with new products displace incumbent products
An explanation for the slope of the LM curve is that as
income rises, money demand rises, and a higher interest rate is required
reduction of consumer confidence, inducing people to save more. To stabilize AD, the Fed should
increase M to lower int rate
In the classical model with fixed income, an increase in the real interest rate could be the result of a(n):
increase in government spending
IS-LM, causes both int and income to decline
increase in taxes
Starting from a steady-state situation, if the saving rate increases, capital per worker will:
increase until the new steady state is reached
if output is above nat level, overtime price will ___ shifting the _____ curve and moving the economy toward LR eq
increase, LM
if the Fed Reserve reduces the interest rate it pays on reserves, it will tend to ____ the money multiplier and ____ the M
increase, increase
if Fed holds the int rate constant in response to an increase in gov purchase, the M will ____ and the impact on outcome will be ____ than if M was constant
increase, larger
if a computer glitch makes companies start accepting cash only, the demand for money will ___. If the M is held constant, the AD will shift to the _____
increase, left
suppose tech reduces the amount of Currency people want to hold. If Fed does nothing, M will _____ but fed can hold M constant if they ______
increase, sell bonds
According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run.
increase; decrease
the more funds that Fed Res makes available for banks to borrow
increases M and B
In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income
increases by more than 250
Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate
increases, increases
Which of the following changes would bring the U.S. capital stock, currently below the Golden Rule level, closer to the steady-state, consumption-maximizing level?
increasing saving rate
If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in
inflation of 1 percent and the nominal interest rate of 1 percent
in the steady state of solow model, higher population growth leads to a ____ level of income per worker and ___ growth in total income
lower, higher
according to the solow model, if an economy increases its saving rate, then in the new steady state, the MPK will be _____ and the growth rate will _____
lower, remain the same
in fractional reserve banking, banks create money by
making loans
The ex ante real interest rate is equal to the nominal interest rate
minus the expected inflation rate
money supply will increase if you increase
monetary base
example of nominal variable
money supply
Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker:
more in Lowland
PE is a function of
national income and planned investment, government spending, and taxes
The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______
national income; goods and services
In a large open economy, the real interest rate is determined by:
national saving, the domestic investment function, and the net capital outflow function
The Phillips curve shows a ______ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a ______ relationship between the price level and output.
negative, positive
Okun's law is the ______ relationship between real GDP and the ______.
negative; unemployment rate
Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances
negatively; positively
In a large open economy, the exchange rate adjusts so that net exports equal
net capital outflow
in large open econ, if import quota is adopted then:
net exports remain unchanged, imports and exports decrease by equal amounts, and real exchange rate will rise
general demand function for real balances depends on the level of income and the
nominal interest rate
_____ GDP measures the value of the economy's output at current price and is a ____ variable
nominal, flow
If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run
only output; only prices
sticky P model of AS explains why
output declines when P falls below expected P
growth rate = g at steady
output per worker, capital per worker, real wage
Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run
output, prices
According to the sticky-price model, output will be at the natural level if
p level equals expected p level
The sacrifice ratio measures the
percentage of a year's real gross domestic product (GDP) that must be forgone to reduce inflation by 1 percentage point
If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______.
positive, positive
Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except
prices do not adjust when there is perfect competition.
According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will
purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
a CB can reduce inflation at the smallest cost if people's expectations of inflation
quickly respond to new policy regimes
an expansion in AD increases _____ in the SR. in the LR it increases only ____
real GDP, price level
The supply and demand for loanable funds determines the
real interest rate
the steady state of the solow with tech progress, ___ is NOT constant
real wage
Holding other factors constant, legislation to cut taxes in an open economy will:
reduce national saving and lead to a trade deficit
Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to:
reduce the firm's wage bill
what makes up assets, liabilities
reserves, loans, securities; deposits, bonds, bank capital
the main cause of the decline in LF participation since 2007 is an increase in the number of
retired workers
the main cause of the decline in LF participation since 2007 is an increase in the number of retired workers
retired workers
seigniorage
revenue increase from printing money
With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______
right; accumulation
what would cause currency to depreciate
rise in price level
In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______
rises, falls
other things equal, all of the following government policies are likely to increase national saving except
running a bud deficit
In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income
sell; rises; decrease
Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis
smaller than the multiplier
According to the sticky-price model
some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.
according to Liq Pref., the central bank can increase the ____ of money and ___ interest rate
supply, lower
rightward shift in aggregate ___ shifts the SR PC so the economy experiences ____ inflation for any level of employment
supply, lower
other things equal, an increase in the world interest rate pushes the trade balance toward ____ and causes currency to ______
surplus, depreciate
An increase in the price of imported goods will show up in
the CPI but not in the GDP deflator.
According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by
the Fed
an increase in the price of goods bought by firms and the gov will show up in
the GDP def but not the CPI
An increase in the price of goods bought by firms and the government will show up in:
the GDP deflator but not in the CPI
NOT a part of Money Supply
the balances in your retirement account
If the nominal interest rate increases, then
the demand for money decreases
if an economy has a large number of discouraged workers
the employment population will be low, but the unemployment rate will not be much affected
at intersection of IS-LM curve
the goods market and money market are both in eq
The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on
the money supply
The imperfect-information model assumes that producers find it difficult to distinguish between changes in:
the overall level of prices and relative prices.
The real wage will increase if:
the productivity of labor increases
although not a goal of the unemployment insurance system, one effect is that the system reduces
the rate of job finding
According to the imperfect-information model, in countries in which there is a great deal of variability of prices
the response of output to unexpected changes in prices will be relatively small.
If net capital outflow is positive, then
the trade balance must be positive
if nominal GDP and real GDP both rise by 10%, then GDP deflator is
unchanged
because most loans are specified in nominal terms, high ____, inflation hurts _____
unexpected, creditors
The real wage is the return to labor measured in:
units of output
real wage is the return of labor in measurements of
units of output
In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of
unplanned inventory investment
People use money as a unit of account when they:
use money as a measure of economic transactions
bank reserves consist of
vault cash and deposits at the Fed Res
prices of items included in CPI are
weighted according to the of item purchased by typical household
An economy has Cobb-Doug of Y = 10K^1/3L^2/3. If stock of capital doubles, the share of total income paid the owners of the capital
will stay the same
according to the theory of eff wages, paying an above equilibrium wage may increase all of the following except
worker turnover
the main goal of unemployment insurance system is to reduce
worker's uncertainty about their incomes
an increase in expected price level shifts
SRAS to the left
If a larger share of national output is devoted to investment, then:
a country's long run GDP per capita will be higher
what would make a recession more likely
a decline in the slope of the yield curve
Other things equal, an increase in the interest rate leads to:
a decrease in the quantity of investment goods demanded
Over the business cycle, investment spending ______ consumption spending
is more volatile than
When a firm sells a product out of inventory, GDP:
is not changed
deflation
is rare but it has occurred in the past
when a nation runs a trade deficit
it experiences capital inflow
Real GDP is a good measure of economic well being because
it measures the changes in the Q of goods and services produced by holding P constant
if the Fed responds to an adverse supply shock by expanding the M, it will
keep the economy closer to its natural levels of output and employment
thomas malthus felt that
larger populations put a strain on the economy's food producing capacity
US economy has ____ capital than the GR suggesting that it may be desirable to ___ the rate of saving
less, increase
as a result of contraction in AD, the ___ declines, but over tie it returns to its former level as the expected P level ____
level of output, falls